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International reserves and rollover risk

  • Javier Bianchi
  • Juan Carlos Hatchondo

This paper provides a theoretical framework for quantitatively investigating the optimal accumulation of international reserves as a hedge against rollover risk. We study a dynamic model of endogenous default in which the government faces a tradeoff between the insurance benefits of reserves and the cost of keeping larger gross debt positions. A calibrated version of our model is able to rationalize large holdings of international reserves, as well as the procyclicality of reserves and gross debt positions. Model simulations are also consistent with spread dynamics and other key macroeconomic variables in emerging economies. The benefits of insurance arrangements and the effects of restricting the use of reserves after default are also analyzed.

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Paper provided by Federal Reserve Bank of Dallas in its series Globalization and Monetary Policy Institute Working Paper with number 151.

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Date of creation: 2013
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Handle: RePEc:fip:feddgw:151
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